Three essays on Public Policy and Foreign Aid

• Main Authors: Meng-yi Tai, 戴孟宜
• Other Authors: Shih-wen Hu
• Format: Others
• Language: en_US
• Published: 2008
• Online Access: http://ndltd.ncl.edu.tw/handle/06384546766147132499

博士 === 逢甲大學 === 經濟學所 === 96 === Many countries have embarked on a series of tariff cuts in order to tally with the trade negotiations following the Uruguay Round of the GATT. The subsequent reduction in the tax revenue resulting from these tariff cuts has caused governments to pay attention to the issue of fiscal imbalance. In order to compensate for the resulting loss of revenue, some countries have considered raising indirect taxes to balance the government budget. When faced with adjustments in the sources of government tax revenue, it needs to be asked how macroeconomic variables fluctuate. This is the key feature of Chapter 2. However, underdeveloped countries are often unable to balance their budgets by coordinating their tariff reductions and tax reform. Moreover, because of the tax revenue limitations, they have not been able to generate enough financial support to deal with the problems associated with a deteriorating environment, disease, or a lack of infrastructure, and then the foreign aid has become an external resource of government revenue. Consequently, the analysis in Chapters 3 and 4 focuses on the effect (it is economic growth that has attracted more attention) of aid being allocated to infrastructure, pollution abatement or the health services of the recipient countries. In Chapter 2, we find that as tariff cuts are combined with point-for-point increases in commodity taxes, the domestic price will fall, and the exchange rate will either rise or fall depending on the relative magnitude of the transactional and precautionary motivations of monetary demand in the long run. However, the combination of tariff cuts and increases in commodity taxes so as to keep the government revenue constant has an ambiguous impact on both domestic prices and the exchange rate. In the short run, regardless of what kinds of tariff-tax reforms are implemented, the exchange rate will exhibit various dynamic patterns, including overshooting, undershooting and misadjustment with anticipated tariff-tax reforms. In Chapter 3, since infrastructure is a productive factor, an increase in the allocation of aid to investments in infrastructure enhances growth and hence the welfare of the economy. However, a higher tying ratio of aid to pollution abatements may not help the economy because it crowds out these infrastructure investments. Infrastructure investments are also partly financed by income taxation. In the presence of foreign aid, the welfare-maximizing income tax rate is higher than the growth-maximizing rate. This is because the untied portion of aid is a lump-sum transfer and it increases the household’s consumption and hence welfare. Chapter 4 introduces foreign health aid in the endogenous growth model. We find that the aid-tying ratio has a positive impact on the equilibrium growth rate, while it has an ambiguous impact on social welfare. Both the growth and welfare effect of an increase in the tying-ratio of aid on health, the income tax rate, and the tying-ratio of income tax on health are uncertain. Moreover, there exists an optimal tying-ratio of aid on health, an optimal tying-ratio of income tax on health, and an optimal income tax rate at the growth-maximizing level, where social welfare follows an upward trend.